The market’s message is mixed. A gloomy winter gave way to an early spring rally. A number of pundits say the economy has begun to put the brakes on its slide.
No matter what the talking heads say, there are opportunities to be had, according to Ted Parrish, principal and director of investments for The Henssler Financial Group, a $1 billion investment firm based in suburban Atlanta. Parrish, a regular market pundit, says his firm’s proprietary analysis reveals a handful of solid bargains. He describes the house investment style as a blend of value and growth. His sights are set on companies with sound finances and a long-term track record of earnings growth.
Parrish is a co-manager of the Henssler Equity Fund (HEQFX), which maintains the same investment strategy the firm uses for many of its high-net-worth and institutional clients. Parrish typically focuses on big company stocks, and his fund’s 49 holdings range from $2 billion to more than $300 billion in stock market worth. He seeks quality companies that show consistency.
The million-dollar question, of course, is what do you make of the market right now?
This market is laying the foundation for solid growth in the years ahead. Yes, there’s been death-defying volatility in the late months of 2008 and early 2009. Overall, I think the market has overshot to the downside because of the financial crisis and people have a bad taste in their mouths for stocks. I think it’s a good time to invest, however, particularly if you have money you don’t have to touch in the next 10 years.
What leads you to say that?
First, we see the Obama administration taking steps to shore up banks and get lending back on track. The toxic asset program is a positive no matter how you split it. The problem before was indecisiveness on the part of the new administration. Once a plan was in place, things were surer for financial stocks and the economy. At the same time the market’s meltdown during the last few months has created some very attractive deals. As an example, you have companies such as Cisco Systems and Microsoft trading at price-to-earnings ratios in the low teens.
So what do you like right now?
Frankly, we like some of everything right now. The market has a lot of great opportunities in just about every sector. We hold an overweighting in industrial stocks, compared to the Standard & Poor’s 500, for instance. Stock prices in the group have been knocked down a lot. A big positive, however, is the global infrastructure build-out, which will benefit a lot of these companies. In order to combat the global recession, a lot of countries are putting money back into their infrastructure. We know about the stimulus package and on top of that, China has a $500 billion program to do much the same.
How do companies make it into your portfolio?
We’ve got several screening criteria. First, in order to eliminate fly-by-night companies, we judge financial strength and we look for companies that have received an A- or above grade from the investment research firms Value Line and Standard & Poor’s. That leaves us with a bucket of about 775 companies. We whittle that list down further by limiting it to companies that have three- to five-year projected earnings growth rates of 12% per year or better, according to consensus Wall Street estimates. That way, we’re looking for the type of total return that can be used to pay dividends or to push a stock’s value upward.
You’ve got growth investing covered. Where’s the value?
In order to screen for value, we look for companies with a price-to-earnings growth ratio, or PEG, of one or less. That means you’re paying one dollar for every percentage point of earnings growth. We’re willing to expand that a bit for certain high-growth industries as well. At the end of that screening we have a group of 150 stocks from which to select.
So what does that leave you?
That leaves us stocks we can hold long term. Our portfolio turnover ranges between 35% and 40%, so we’re often holding stocks three years or longer. Looking at that in terms of industries, our largest position is in technology, a high-growth sector, and consumer staples, a classic defensive group that holds up in rough times.
You said you like industrials–what’s your favorite in the group right now?
General Electric (GE) is one of our top picks. It’s trading at a price less than the value of its industrial business alone. Essentially, if you buy GE you get its financial arm, GE Capital, for free. The industrial business is unmatched in terms of size and reach. GE is a giant in energy infrastructure–its equipment is used in oil field expansion or extensions of the power grid. Its power and transportation businesses should stabilize earnings. Meanwhile, the stress surrounding GE Capital was overdone. The company has said its financial division is well capitalized and should earn a profit this year. That’s not priced into the stock. We think GE can get to $20 in the next 12 to 18 months.
Does that mean the skies have cleared for financials?
Some financials are attractive. The group’s been routed the last two years and had fallen about 75% from when the S&P 500 reached its high in October 2007. I cast off Citigroup and American International Group long before their stock cratered, and right now I do own regional banks. They had little exposure to derivative products and their lending practices were less aggressive than some of the bigger banks. I like the business model, too. The regionals are closer to their customers and know them better. Delinquencies may be elevated in an economy like this but the regionals have a better grip on their customers’ financial position. The group is very much undervalued, and the toxic asset purchase program should help the balance sheets of regionals. I’d recommend an ETF [exchange-traded fund] for exposure to the group–the iShares Dow Jones U.S. Regional Banks Index (IAT).
OK, that’s two value plays. Are there any growth picks out there now?
I think Stryker (SYK), a medical and surgical equipment outfit, is a company that’s maintained a solid growth record. The company makes orthopedic implants–hips, knees, elbows, and shoulders. Stryker has posted 20% annual earnings growth for 31 years. Recently the company brought expectations down to 15% or so over the next five years. Stryker’s products are dominant, but the one threat is that the U.S. government could jeopardize their margins as the Obama administration looks to squeeze costs from the healthcare system. That said, the stock is trading at an all-time low of 10.5 times 2009 earnings. Stryker’s balance sheet has no debt and there’s every reason to think the stock can stage a turnaround after falling from a 52-week high of $69. I think the stock can make it back to $48 a share in the next 12 to 18 months.
This story originally appeared in the June 2009 issue of Black Enterprise magazine.